Microsoft is preparing a cut-down version of Windows XP to sell cheaply in the Far East in an effort to prevent Linux stealing the OS market.

In an interview with the Bangkok Post, Microsoft Thailand MD Andrew McBean, revealed that the software giant is working on a “light” version of its latest operating system at its US headquarters, to be sold at a lower-than-usual cost.

It will, of course, be easily upgradeable to the full-fat Windows XP Home, or Professional edition, for a bit more cash.

McBean would not say when XP-Lite will be made available, or what its pricing would be, but he did say it would come after the May release of XP Service Pack 2, which will contain mostly security additions.

The fact that Microsoft is going to the trouble of producing a cut-down OS is extremely significant. It demonstrates, more than ever before, how Linux and the rise of open-source software has caused the market to drive Microsoft, rather than the other way around.

The software giant has been caught in a bind where it refuses to step back from its policy of one worldwide price for its products, but remains hopelessly expensive in important emerging markets. When, last year, IBM started selling cheap Linux notebooks to Thailand, and then in September, the Japanese, Chinese and South Korean governments announced a joint open-source project, the writing was on the wall.

Some pundits predicted that Microsoft would drastically reduce the cost of its licenses to prevent the market being stolen from underneath it. Instead, it has stumbled upon the idea of a Fisher Price version, allowing it to continue to charge the same everywhere else.

Whether it will work only time will tell. But the decision - which will require a huge amount of coding since Windows is not exactly modular and easy to reduce down - is yet another indication that it is taking Linux and open source seriously enough to override its traditional arrogance and inflexibility.